As filed with the Securities and Exchange Commission on August 7, 2014.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-36088
Covisint Corporation
(Exact name of registrant as specified in its charter)
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| | | | |
MICHIGAN (State or other jurisdiction of incorporation or organization) | | | | 26-2318591 (I.R.S. Employer Identification Number) |
One Campus Martius, Suite 700, Detroit, Michigan 48226-5099
(313) 961-4100
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | | | Accelerated filer o |
Non-accelerated filer x | | (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:
As of August 7, 2014, there were outstanding 37,892,408 shares of Common Stock, no par value, of the registrant.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Covisint Corporation
Detroit, Michigan
We have reviewed the accompanying condensed consolidated balance sheet of Covisint Corporation and subsidiaries (the “Company”) as of June 30, 2014, and the related condensed consolidated statements of comprehensive loss and cash flows for the three-month periods ended June 30, 2014 and 2013, and shareholders’ equity for the three-month period ended June 30, 2014. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Covisint Corporation and subsidiaries as of March 31, 2014, and the related consolidated statements of comprehensive loss, shareholders’ equity, and cash flows of the Company, for the year then ended (not presented herein); and in our report dated May 30, 2014, we expressed an unqualified opinion on those consolidated financial statements (which report includes an explanatory paragraph referring to the financial statements prior to January 1, 2013 being prepared from the records of Compuware Corporation). In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
August 7, 2014
COVISINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited) |
| | | | | | | | | |
| | | | June 30, 2014 | | March 31, 2014 |
| ASSETS | | | | | |
| CURRENT ASSETS: | | | | | |
| Cash | | |
| $43,129 |
| |
| $49,536 |
|
| Accounts receivable, net | | | 18,732 |
| | 21,838 |
|
| Deferred tax asset, net | | | 677 |
| | 1,017 |
|
| Due from parent and affiliates | | | 4,136 |
| | 2,813 |
|
| Other current assets | | | 6,599 |
| | 5,983 |
|
| Total current assets | | | 73,273 |
| | 81,187 |
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| PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION | | | 4,940 |
| | 4,751 |
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| CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET | | | 22,047 |
| | 23,040 |
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| OTHER: | | | | | |
| Goodwill | | | 25,385 |
| | 25,385 |
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| Deferred costs | | | 5,198 |
| | 6,188 |
|
| Deferred tax asset, net | | | 127 |
| | 131 |
|
| Other assets | | | 754 |
| | 766 |
|
| Total other assets | | | 31,464 |
| | 32,470 |
|
| TOTAL ASSETS | | |
| $131,724 |
| |
| $141,448 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
| CURRENT LIABILITIES: | | | | | |
| Accounts payable | | |
| $3,963 |
| |
| $3,893 |
|
| Accrued commissions | | | 1,245 |
| | 1,640 |
|
| Deferred revenue | | | 14,806 |
| | 16,606 |
|
| Accrued expenses | | | 3,649 |
| | 3,752 |
|
| Due to parent and affiliates | | | — |
| | — |
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| Total current liabilities | | | 23,663 |
| | 25,891 |
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| DEFERRED REVENUE | | | 9,119 |
| | 11,223 |
|
| ACCRUED LIABILITIES | | | 56 |
| | 56 |
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| DEFERRED TAX LIABILITY, NET | | | 2,421 |
| | 2,668 |
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| Total liabilities | | | 35,259 |
| | 39,838 |
|
| COMMITMENTS AND CONTINGENCIES | | | — |
| | — |
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| SHAREHOLDERS' EQUITY: | | | | | |
| Preferred stock, no par value - authorized 5,000,000 shares; none issued and outstanding | | | — |
| | — |
|
Common stock, no par value - authorized 50,000,000 shares; issued and outstanding 37,601,019 (37,490,500 issued and outstanding as of March 31, 2014) | | | — |
| | — |
|
| Additional paid-in capital | | | 147,533 |
| | 140,569 |
|
| Retained deficit | | | (51,063 | ) | | (38,947 | ) |
| Accumulated other comprehensive income (loss) | | | (5 | ) | | (12 | ) |
| Total shareholders' equity | | | 96,465 |
| | 101,610 |
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| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | |
| $131,724 |
| |
| $141,448 |
|
See notes to condensed consolidated financial statements.
COVISINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands, Except Per Share Data)
(Unaudited)
|
| | | | | | | |
| | | Three Months Ended
June 30, |
| | | 2014 | 2013 |
| REVENUE | |
| $21,587 |
|
| $24,101 |
|
| COST OF REVENUE | | 15,266 |
| 13,310 |
|
| GROSS PROFIT | | 6,321 |
| 10,791 |
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| OPERATING EXPENSES: | | | |
| Research and development | | 3,116 |
| 2,585 |
|
| Sales and marketing | | 9,772 |
| 7,339 |
|
| General and administrative | | 5,546 |
| 5,534 |
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| Total operating expenses | | 18,434 |
| 15,458 |
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| OPERATING LOSS | | (12,113 | ) | (4,667 | ) |
| | | | |
| Other income | | 22 |
| — |
|
| | | | |
| LOSS BEFORE INCOME TAX PROVISION | | (12,091 | ) | (4,667 | ) |
| INCOME TAX PROVISION | | 25 |
| 3 |
|
| NET LOSS | |
| ($12,116 | ) |
| ($4,670 | ) |
| Basic and diluted loss per share | |
| ($0.32 | ) |
| ($0.16 | ) |
| OTHER COMPREHENSIVE INCOME, NET OF TAX | | | |
| Foreign currency translation adjustments | |
| $7 |
|
| ($1 | ) |
| OTHER COMPREHENSIVE INCOME, NET OF TAX | | 7 |
| (1 | ) |
| COMPREHENSIVE LOSS | |
| ($12,109 | ) |
| ($4,671 | ) |
See notes to condensed consolidated financial statements.
COVISINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 2014
(In Thousands, Except Share Data)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In | | Retained | | Accumulated Other Comprehensive | | Total Shareholders' |
| | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Equity |
| Balance at March 31, 2014 | 37,490,500 |
| |
| $— |
| |
| $140,569 |
| |
| ($38,947 | ) | |
| ($12 | ) | |
| $101,610 |
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| Net loss | | | | | | | (12,116 | ) | | | | (12,116 | ) |
| Parent contribution of stock awards and related taxes, net | | | | | (12 | ) | | | | | | (12 | ) |
| Covisint stock compensation (Note 5) | | | | | 2,479 |
| | | | | | 2,479 |
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| Covisint stock option exercises | 110,519 |
| | | | 196 |
| | | | | | 196 |
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| Income taxes | | | | | 4,301 |
| | | | | | 4,301 |
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| Foreign currency translation | | | | | | | | | 7 |
| | 7 |
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| Balance at June 30, 2014 | 37,601,019 |
| |
| $— |
| |
| $147,533 |
| |
| ($51,063 | ) | |
| ($5 | ) | |
| $96,465 |
|
See notes to condensed consolidated financial statements.
COVISINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
| | | | | | |
| | Three Months Ended
June 30, |
| | 2014 | 2013 |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | |
| Net loss |
| ($12,116 | ) |
| ($4,670 | ) |
| Adjustments to reconcile net income (loss) to cash provided by (used in) operations: | | |
| Depreciation and amortization | 2,343 |
| 2,092 |
|
| Deferred income taxes | (53 | ) | 4 |
|
| Stock award compensation | 2,619 |
| 486 |
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| Net change in assets and liabilities: | | |
| Accounts receivable | 3,108 |
| 2,538 |
|
| Other assets | 458 |
| 618 |
|
| Accounts payable and accrued expenses | (438 | ) | (1,078 | ) |
| Deferred revenue | (3,898 | ) | (275 | ) |
| Net cash provided by (used in) operating activities | (7,977 | ) | (285 | ) |
| CASH FLOWS USED IN INVESTING ACTIVITIES: | | |
| Purchase of: | | |
| Property and equipment | (820 | ) | (171 | ) |
| Capitalized software | (790 | ) | (1,952 | ) |
| Net cash used in investing activities | (1,610 | ) | (2,123 | ) |
| CASH FLOWS PROVIDED BY FINANCING ACTIVITES: | | |
| Cash payments from parent company | 8,775 |
| 26,224 |
|
| Cash payments to parent company | (5,787 | ) | (23,103 | ) |
| Initial public offering costs | — |
| (299 | ) |
| Net proceeds from exercise of stock awards | 196 |
| — |
|
| Net cash provided by financing activities | 3,184 |
| 2,822 |
|
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | (4 | ) | 8 |
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| NET CHANGE IN CASH | (6,407 | ) | 422 |
|
| CASH AT BEGINNING OF PERIOD | 49,536 |
| 966 |
|
| CASH AT END OF PERIOD |
| $43,129 |
|
| $1,388 |
|
| | | |
See notes to condensed consolidated financial statements.
COVISINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements (“Financial Statements”) include the accounts of Covisint Corporation and subsidiaries, a Michigan corporation majority-owned by Compuware Corporation (“Compuware” or the “Parent”).
The Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), for interim financial information and with the instructions of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based its assumptions and estimates on the facts and circumstances existing at June 30, 2014, final amounts may differ from these estimates. In the opinion of the Company’s management, the accompanying Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented.
The Company evaluated subsequent events through the date its financial statements were issued.
These financial statements should be read in conjunction with the Company's 2014 Annual Report on Form 10-K. Prior to April 1, 2014, the Compuware allocation was recorded within general and administrative expense. Effective April 1, 2014, the allocation was replaced with actual expenses and these have been recorded in each respective line item. Other than this allocation, there have been no significant changes to the Company’s accounting policies as disclosed in the Company’s 2014 Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this ASU effective April 1, 2014, and the adoption did not have a significant impact on the Company's financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," a new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that revenue should be recognized as goods or services are transferred to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in the ASU. The Company is currently evaluating the impact of adopting this guidance.
2. CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS
The components of the Company’s intangible assets are as follows (in thousands):
|
| | | | | | | | | | | |
| | June 30, 2014 |
| | Gross Carrying Amount |
| Accumulated Amortization |
| Net Carrying Amount |
| Indefinite-lived intangible assets: |
|
|
|
|
|
| Trademarks(1) |
| $358 |
| | | |
| $358 |
|
| Amortizing intangible assets: | | | | | |
| Capitalized software(2) |
| $49,778 |
| |
| ($28,772 | ) | |
| $21,006 |
|
| Customer relationship agreements(3) | 4,715 |
| | (4,032 | ) | | 683 |
|
| Trademarks(4) | 340 |
| | (340 | ) | | — |
|
| Total amortizing intangible assets |
| $54,833 |
| |
| ($33,144 | ) | |
| $21,689 |
|
|
| | | | | | | | | | | |
| | March 31, 2014 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Indefinite-lived intangible assets: | | | | | |
| Trademarks(1) |
| $358 |
| | | |
| $358 |
|
| Amortizing intangible assets: | | | | | |
| Capitalized software(2) |
| $48,989 |
| |
| ($27,067 | ) | |
| $21,922 |
|
| Customer relationship agreements(3) | 4,715 |
| | (3,955 | ) | | 760 |
|
| Trademarks(4) | 340 |
| | (340 | ) | | — |
|
| Total amortizing intangible assets |
| $54,044 |
| |
| ($31,362 | ) | |
| $22,682 |
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_____________________________________________________
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(1) | The Covisint trademarks were acquired by Compuware in an acquisition in March 2004. These trademarks are deemed to have an indefinite life and therefore are not being amortized. |
| |
(2) | Amortization of capitalized software is included in “cost of revenue” in the condensed consolidated statements of comprehensive loss. Capitalized software is generally amortized over five years. |
| |
(3) | Amortization of customer relationship agreements is included in “sales and marketing” in the condensed consolidated statements of comprehensive loss. Customer relationship agreements were acquired as part of acquisitions and are being amortized over periods up to six years. |
| |
(4) | Amortization of trademarks is included in “general and administrative” in the condensed consolidated statements of comprehensive loss. Trademarks were acquired as part of acquisitions and are being amortized over three years. |
Amortization expense of intangible assets was $1.8 million and $1.7 million for the three months ended June 30, 2014 and 2013, respectively. Estimated future amortization expense, based on identified intangible assets at June 30, 2014, is expected to be as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | At June 30, 2014 for the Year Ending March 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Capitalized software |
| $5,170 |
| |
| $6,226 |
| |
| $5,277 |
| |
| $3,238 |
| |
| $933 |
|
| Customer relationships | 231 |
| | 308 |
| | 144 |
| | — |
| | — |
|
| Total |
| $5,401 |
|
|
| $6,534 |
|
|
| $5,421 |
|
|
| $3,238 |
|
|
| $933 |
|
3. EARNINGS PER COMMON SHARE
Basic earnings per common share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potentially dilutive equivalent shares outstanding using the treasury method.
EPS data were computed as follows (in thousands, except for per share data):
|
| | | | | | |
| | Three Months Ended June 30, |
| | 2014 | 2013 |
| Basic loss per share: | | |
| Numerator: Net loss |
| ($12,116 | ) |
| ($4,670 | ) |
| Denominator: | | |
| Weighted-average common shares outstanding | 37,499 |
| 30,003 |
|
| Basic loss per share |
| ($0.32 | ) |
| ($0.16 | ) |
| Diluted loss per share: | | |
| Numerator: Net loss |
| ($12,116 | ) |
| ($4,670 | ) |
| Denominator: | | |
| Weighted-average common shares outstanding | 37,499 |
| 30,003 |
|
| Dilutive effect of stock awards | — |
| — |
|
| Total shares | 37,499 |
| 30,003 |
|
| Diluted loss per share |
| ($0.32 | ) |
| ($0.16 | ) |
Stock awards to purchase approximately 4,531,000 and 4,274,000 shares for the three months ended June 30, 2014 and 2013, respectively, were excluded from the diluted EPS calculation because they were anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
The Company entered into standalone operating lease agreements for its Shanghai, China and Detroit locations in the first quarter of our fiscal year 2015. The Shanghai lease expires on April 30, 2017 and does not contain any purchase obligations associated with the lease. The total future minimum lease obligation of the Shanghai lease is approximately $1.5 million as of June 30, 2014. The lease agreement for the Company's Detroit location expires March 31, 2015.
Legal Matters
The Company is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business. In accordance with U.S. GAAP, the Company makes a provision for a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.
Beginning on May 30, 2014, two putative class actions were filed in the U.S. District Court for the Southern District of New York against the Company, directors and certain officers at the time of the Company's initial public offering ("IPO") alleging violation of securities laws in connection with the Company's IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to vigorously defend them. The Company currently has no other outstanding material litigation.
5. BENEFIT PLANS
Compuware Stock-Based Compensation Plans
As the Company is a majority-owned subsidiary of Compuware, certain Covisint employees have been granted Compuware stock compensation awards. In accordance with the provisions of Staff Accounting Bulletin (“SAB”) 1.B.1, “Costs Reflected in Historical Financial Statements,” the expense for these awards is included within the condensed consolidated statements of comprehensive loss.
Compuware Stock Option Activity
A summary of option activity for Covisint employees under Compuware’s stock-based compensation plans as of June 30, 2014, and changes during the three months then ended is presented below. Shares and intrinsic value are presented in thousands.
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2014 |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
| Options outstanding as of April 1, 2014 | 472 |
| |
| $9.23 |
| | | | |
| Granted | — |
| | | | | | |
| Exercised | (29 | ) | | 8.12 |
| | | |
| $59 |
|
| Forfeited | (26 | ) | | 9.84 |
| | | | |
| Cancelled/expired | (12 | ) | | 11.16 |
| | | | |
| Options outstanding as of June 30, 2014 | 405 |
| |
| $9.21 |
| | 1.77 | |
| $366 |
|
| Options vested and expected to vest, net of estimated forfeitures, as of June 30, 2014 | 393 |
| |
| $9.19 |
| | 1.72 | |
| $366 |
|
| Options exercisable as of June 30, 2014 | 279 |
| |
| $8.90 |
| | 1.23 | |
| $357 |
|
The vesting schedule of options has varied over the years with the following vesting terms being the most common: (1) 50 percent of shares vest on the third anniversary date and 25 percent on the fourth and fifth anniversary dates; (2) 25 percent of
shares vest on each annual anniversary date over four years; or (3) 30 percent of shares vest on the first and second anniversary dates and 40 percent vest on the third anniversary date.
All options were granted with exercise prices at or above fair market value on the date of grant and expire ten years from the date of grant. Option expense is recognized on a straight-line basis over the vesting period unless the options vest more quickly than the expense would be recognized. In this case, additional expense is taken to ensure the expense is proportionate to the percent of options vested at any point in time.
During the three months ended June 30, 2014, 1,376 Compuware option shares granted to Covisint employees vested, with an average fair value of $8.63 per share.
Compuware Restricted Stock Units
A summary of non-vested restricted stock units (“RSUs”) activity for Covisint employees and directors under the Compuware LTIP as of June 30, 2014, and changes during the three months then ended is presented below. Shares and intrinsic value are presented in thousands.
|
| | | | | | | | | | |
| | Three Months Ended June 30, 2014 |
| | Shares | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value |
| Non-vested RSU outstanding at April 1, 2014 | 182 |
| | | | |
| Granted | — |
| |
|
| | |
| Released | (32 | ) | | | |
| $320 |
|
| Forfeited | (4 | ) | | | | |
| Dividend equivalents, net | 1 |
| |
| $9.74 |
| | |
| Non-vested RSU outstanding at June 30, 2014 | 147 |
| | | | |
RSUs have various vesting terms related to the purpose of the award. The most common vesting term is 25 percent of shares vest on each annual anniversary date over four years.
The awards are settled by the issuance of one common share of Compuware stock for each unit upon vesting and vesting accelerates upon death, disability or a change in control of Compuware.
Compuware paid quarterly dividends of $0.125 per share. As a result of these dividend payments, approximately 967 dividend equivalent shares were issued to participants holding non-vested RSUs as of the dividend record date during the three months ended June 30, 2014, respectively.
Covisint 401(k) Plan
The Company matches 33 percent of employees’ 401(k) contributions up to 2 percent of eligible earnings. Matching contributions vest 100 percent when an employee attains one year of service. During the three months ended June 30, 2014 and 2013, the Company expensed $0.2 million and $0.2 million related to this program.
Covisint Stock-Based Compensation Plan
In August 2009, Covisint established a 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the Board of Directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and annual cash incentive awards to employees and directors of Covisint and its affiliates. The 2009 Covisint LTIP reserves 4.5 million common shares of Covisint for issuance under this plan. On December 30, 2013, the Board of Directors of Covisint Corporation adopted the First Amendment to the 2009 Covisint LTIP, subject to shareholder approval. The Amendment increased the number of shares of Covisint’s common stock available for issuance pursuant to stock-based awards granted under the LTIP by 3 million shares (increasing the number of shares available for issuance under the LTIP from 4.5 million to 7.5 million). On January 2, 2014, Compuware, as holder of the majority of the outstanding shares of the Company's common stock, approved the Amendment to increase the shares available. The increase in shares set forth in the Amendment became effective on February 13, 2014, twenty (20) days after the date of mailing of the Company’s Schedule 14C Information Statement to the Company's shareholders.
As of June 30, 2014, there were 4.4 million stock options outstanding from the 2009 Covisint LTIP. The Company recognized stock compensation expense of $2.6 million for the three months ended June 30, 2014.
Certain individuals, who received stock options from the 2009 Covisint LTIP, were also eligible to be awarded performance-based stock awards (“PSAs”) from the Compuware 2007 LTIP. As of June 30, 2013, there were 631,000 PSAs that were cancelled upon the closing of the Covisint IPO. PSA expense totaling $0.2 was recorded to “general and administrative” during the three months ended June 30, 2013. As the PSAs were cancelled upon IPO, no expense was recognized during the three months ended June 30, 2014.
Stock Option Activity
A summary of option activity under the Company’s stock-based compensation plans as of June 30, 2014, and changes during the three months then ended is presented below (shares and intrinsic value in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2014 |
| | Number of Options | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
| Options outstanding as of April 1, 2014 | 4,458 |
|
| $3.48 |
| | | | |
| Granted | 140 |
| 7.20 |
| | | | |
| Exercised | (111 | ) | 1.77 |
| | | | |
| Forfeited | (69 | ) | 9.39 |
| | | | |
| Options outstanding as of June 30, 2014 | 4,418 |
|
| $3.54 |
| | 3.38 | |
| $9,698 |
|
| Options vested and expected to vest, net of estimated forfeitures, as of June 30, 2014 | 4,346 |
|
| $3.42 |
| | 3.28 | |
| $9,698 |
|
| Options exercisable as of June 30, 2014 | 1,954 |
|
| $2.58 |
| | 2.11 | |
| $5,002 |
|
All options were originally granted at estimated fair market value for those granted prior to IPO, and at fair market value for those granted post IPO. Options expire 10 years from the date of grant unless expiration has been otherwise accelerated in accordance with a termination and/or separation agreement.
For the quarter ended June 30, 2014, 110,519 options were exercised by participants of the 2009 Covisint LTIP.
Stock Awards Compensation
For the three months ended June 30, 2014 and 2013, respectively, stock awards compensation expense was recorded as follows in thousands:
|
| | | | | | | |
| | Three Months Ended June 30, |
| | 2014 | | 2013 |
| Stock awards compensation classified as: | | | |
| Cost of revenue |
| $515 |
| |
| $5 |
|
| Research and development | 66 |
| | 47 |
|
| Sales and marketing | 605 |
| | 47 |
|
| General and administrative | 1,432 |
| | 387 |
|
| Total stock awards compensation expense before income taxes |
| $2,618 |
| |
| $486 |
|
Total stock awards compensation expense before income taxes of $2.6 million for the three months ended June 30, 2014, is comprised of $1.5 million of stock compensation expense according to the normal expense recognition schedule of the grant and
$1.1 million of expense recognized due to employee terminations, which, pursuant to the terms of these options, accelerated vesting.
As of June 30, 2014, total unrecognized compensation cost of $5.5 million, net of estimated forfeitures, related to nonvested equity awards granted is expected to be recognized over a weighted-average period of approximately 1.5 years. The following table summarizes the Company’s future recognition of its unrecognized compensation cost related to stock awards as of June 30, 2014 (in thousands).
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ending March 31, |
| Stock-Based Compensation Plan: | Total | | 2015 | | 2016 | | 2017 | | 2018 |
| | | | | | | | | | |
| Covisint |
| $5,381 |
| |
| $2,761 |
| |
| $1,715 |
| |
| $543 |
| |
| $362 |
|
| Compuware | 156 |
| | 30 |
| | 89 |
| | 37 |
| | — |
|
| Total |
| $5,537 |
| |
| $2,791 |
| |
| $1,804 |
| |
| $580 |
| |
| $362 |
|
In order for Compuware to retain over eighty percent (80%) ownership of Covisint common stock to qualify under the United States Internal Revenue Code Section 355 for a subsequent tax-free distribution of its shares in Covisint to Compuware shareholders, in early June 2014, (a) Covisint issued tandem stock appreciation rights (“SARs”) to its option holders who had options exercisable in 2014; and (b) Covisint and Compuware entered into a Purchase Agreement for Compuware to purchase from Covisint shares of Covisint common stock to fund Covisint’s cash outlay resulting from the exercise of the SARs. Due to Compuware's purchase of 1,381,920 shares of Covisint common stock in the open market during June 2014, Compuware owns sufficient shares of Covisint to maintain its ownership percentage despite the exercise of outstanding vested Covisint options. Accordingly, the tandem SARs were no longer necessary, and, on June 17, 2014, Covisint rescinded the tandem SARs granted to its option holders. On June 20, 2014, Compuware and Covisint agreed to terminate the Purchase Agreement, with a termination date of June 20, 2014.
6. RELATED PARTY TRANSACTIONS
The Company previously utilized professional services staff of Compuware to provide certain services to customers and to provide additional resources for research and development activities. These costs were included in “cost of revenue” and “research and development” as applicable. Effective January 31, 2014, Compuware sold substantially all of the assets related to Compuware's Professional Services business unit to Marlin Equity Partners. As such, related party charges for professional services totaled $0.0 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively.
Certain related party transactions are settled in cash and are reflected as due to or due from parent and affiliates within the condensed consolidated balance sheet. At June 30, 2014, the Company had a net receivable due from parent of $4.1 million as compared to a net receivable of $2.8 million at March 31, 2014. The activity in the three months ended June 30, 2014 was primarily comprised of Compuware's repayment of the ($2.8) million receivable as of March 31, 2014, and $4.2 million related to the required payment from Compuware for its use of the Company’s tax loss and other tax related attributes. This activity was partially offset by ($0.1) million due to miscellaneous intercompany activity, primarily working capital movements such as customer collections and vendor payments. Compuware is the lessor of the Company's Detroit real estate lease.
7. SUBSEQUENT EVENTS
On July 1, 2014, the Company granted Mr. Inman an option to purchase 750,000 shares of the Company’s common stock with an exercise price of $4.86 per share. The option vests in three equal parts on the first three anniversaries of the grant date. All of the unvested option shares will immediately vest and be exercisable on the date of the termination of Mr. Inman’s employment through the option expiration date: (1) in the event that the Mr. Inman ceases to be employed due to his death or disability; (2) under the circumstances set forth in Mr. Inman’s Severance Agreement; (3) in the event Mr. Inman is terminated by the Company without Cause as defined in the Severance Agreement; or (4) if he is constructively terminated following the effective date of a change in control of the Company.
On July 1, 2014, the Company granted Mr. Inman 182,193 restricted stock units, which vest in equal parts on the first three anniversaries of the grant date. All of the unvested restricted stock units will immediately vest and become non-forfeitable on the date of the termination of Mr. Inman’s employment: (1) in the event that Mr. Inman ceases to be employed due to his death or disability; (2) under the circumstances set forth in Mr. Inman’s Severance Agreement; (3) in the event Mr. Inman is terminated by the Company without Cause as defined in the Severance Agreement; or (4) if he is constructively terminated following the effective date of a change in control of the Company.
On August 4, 2014, the Company received from Compuware $4.1 million, the balance due from parent and affiliates as of June 30, 2014.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report under “Part II, Other Information—Item 1A, Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
OVERVIEW
Covisint provides a leading cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners, and suppliers. Our platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and lower operating costs.
We believe a wide variety of organizations will benefit from using our cloud-based technologies to meet their external collaboration requirements with their customers, business partners and suppliers. We believe there is a growing available market for our technologies. We believe the use of our solutions and the development of our markets are at very early stages and that it is important that we build brand awareness, develop strategic partners and invest in our platform, vertical solutions, infrastructure and sales and marketing to maintain and extend our leadership in the cloud-based services market.
The majority of our revenue is generated through subscription and support fees paid to enable our customers to access our platform. Subscription and support revenue accounted for $15.5 million and $15.9 million, or 72% and 66% of our total revenue, for the three months ended June 30, 2014 and 2013, respectively. We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our platform, and the performance of projects and enhancements. Services revenue accounted for $6.1 million and $8.2 million, or 28% and 34% of our total revenue, for the three months ended June 30, 2014 and 2013, respectively.
Since March 2014, the Company has undertaken a substantive review of all aspects of its business, including a review of the Company’s leadership, organizational structure, sales performance, product, and deployment of resources. As a result of this assessment, the Company has undertaken a series of strategic initiatives to refocus and reposition the Company for success in fiscal year 2016 and beyond. We accelerated the Company’s transition from a services and software company to a true cloud-based enterprise software company with a go-to market strategy based upon repeatable, platform-based sales. We are enhancing the ability of our customers and service partners to implement and develop on the platform with limited involvement of Company resources. We are investing in developing our relationships with strategic partners, like Cisco Systems, Inc., who provide extensive
global sales presence to access customers that we would not otherwise reach, thereby providing Covisint with additional scale and bandwidth to sell our core subscription business. We launched our certified partner program and aggressively moved to enhance our partners’ abilities to provide service to our customers by agreeing to transfer some of our customer service employees to one of our certified partners. Finally, on May 22, 2014, the Company effectuated a reduction in force of contractors and 69 employees in sales, marketing, operations and research and development. In addition, 21 employees left the company during the three months ended June 30, 2014 through normal attrition.
The automotive industry accounted for 45% and 53% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. The healthcare industry accounted for 32% and 31% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. We have seen increases in revenue from our Enterprise business unit that services the energy, financial services, travel and other non-automotive or healthcare industries, which accounted for 22% and 16% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. Revenue from outside of the U.S. accounted for 18% and 14% of our total revenue for the three months ended June 30, 2014 and 2013, respectively.
Our subscription and support revenue decreased to $15.5 million for the three months ended June 30, 2014 from $15.9 million for the three months ended June 30, 2013, representing an annual decline of 3%. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was primarily due a decline in revenue from customers that terminated or elected not to renew their agreements of $1.3 million, including two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was partially offset by $0.9 million of increased revenue from sales to new and existing customers.
Our services revenue declined to $6.1 million for the three months ended June 30, 2014 from $8.2 million for the three months ended June 30, 2013, representing a period over period decline of 25%. Services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) our relatively low subscription bookings in the 2014 fiscal year.
We experienced net income (losses) of ($12.1) million and ($4.7) million for the three months ended June 30, 2014 and 2013, respectively. Our change in net income (losses) was a result of, a $2.5 million decrease in revenues, a $2.0 million increase in our cost of revenue and a $3.0 million increase in operating expenses, primarily sales and marketing. Our increase in expenses was primarily due to a $2.1 million increase in stock compensation expenses, a $1.3 million increase in salaries and personnel related expenses, and a $1.1 million decrease in capitalized research and development. As presented in "Note 5. Benefit Plans - Stock Awards Compensation" within the accompanying notes to the condensed consolidated financial statements, our loss included stock compensation expense of $2.6 million and $0.5 million, respectively, in the three months ended June 30, 2014 and the three months ended June 30, 2013, which primarily resulted from our IPO.
KEY METRICS
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we monitor a number of other metrics to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue as well as the stock based compensation associated with certain of our professional services and operations employees. Adjusted gross margin is adjusted gross profit as a percentage of revenue.
We have historically capitalized a significant portion of our research and development costs and believe the amortization of capitalized software will increase in absolute dollars. Our total research and development costs incurred were $3.9 million and $4.5 million during the three months ended June 30, 2014 and 2013, respectively. Of our total research and development costs incurred, we capitalized 20% and 43% during the three months ended June 30, 2014 and 2013. We decreased capitalization of our research and development costs during the three months ended June 30, 2014, as compared to the same period in 2013, due to the timing and stage of our initiatives. In the three months ended June 30, 2014, there was an increase of projects in the planning stage and, thus more of our project costs were not capitalized.
We believe that adjusted gross margin, when viewed with our results under U.S. GAAP and the accompanying reconciliation, provides additional information that is useful for evaluating our operating performance. Additionally, we believe that adjusted gross margin provides a more meaningful comparison of our operating results against those of other companies in our industry. We believe that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable amortization costs related to capitalized software. However, adjusted gross margin is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to gross margin as an indicator of operating performance.
The table below provides reconciliations between the non-U.S. GAAP financial measures discussed above to the comparable U.S. GAAP measures of gross profit:
|
| | | | | | | |
| | | Three Months Ended June 30, | |
| | | 2014 | | 2013 | |
| Gross profit | | $6,321 | | $10,791 | |
| Gross margin | | 29 | % | | 45 | % | |
| Adjustments: | | | | | |
| Stock compensation expense—cost of revenue | | $515 | | $5 | |
| % of total revenue | | 2 | % | | — | % | |
| Amortization of capitalized software—cost of revenue | | $1,643 | | $1,648 | |
| % of total revenue | | 8 | % | | 7 | % | |
| Non-GAAP gross profit | | $8,479 | | $12,444 | |
| Non-GAAP gross margin | | 39 | % | | 52 | % | |
COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
Our revenue is primarily comprised of fees related to subscription and support and services performed. Subscription and support revenue includes fees for our customers and their users, such as suppliers or healthcare organizations, to access our platform and for users, messages and end point connections such as suppliers or healthcare organizations. Our services revenue is generated from implementation, solution deployment and on-boarding. Implementation services typically consist of user migration, content migration, branding and configuration to support customer-specific workflows. Our services engagements typically occur in phases
and can vary from a few weeks to several months depending on the scope and complexity of the solution. Our customers may choose to do much of this work in-house, through a third party or with Covisint. We currently subcontract portions of our consulting engagements to third-party implementation partners to supplement our staffing needs within this area of the business.
Cost of Revenue
Our cost of revenue is primarily comprised of salaries and personnel-related expenses related to our customer support, implementation, solution deployment, on-boarding and data center operations, the cost of professional services provided by third-party contractors, depreciation and amortization expenses related to capitalized research and development, acquisitions and capital expenditures, third-party hosting fees, third-party software license fees and outside services related to our call center. Where we have established third-party evidence of the stand-alone value of our services, we recognize expense with the associated revenue recognition as services are delivered. Costs associated with deferred services revenue are recognized ratably, generally over five years, beginning upon customer acceptance of the deliverable consistent with the associated revenue.
We expect that our cost of revenue in absolute dollars will decrease in the future as we reduce our workforce to align costs with revenue. We expect our cost of revenue may fluctuate as a percentage of total revenue due to relative changes in our services revenue, changes in the percentage of services recognized using the proportional performance method, the amount and timing of depreciation and amortization, changes in the amount of services performed by subcontractors, our customers, or directly by certified partners or other vendors and the mix of subscription and support revenue relative to services revenue.
Research and Development
Research and development costs are primarily comprised of salaries and personnel-related expenses, services provided by other third-party contractors related to software development, software license and hardware fees and depreciation, amortization related to acquisitions and capital expenditures and costs from facilities and technology-related costs associated with our research and development functions.
We focus our research and development on new and expanded features of our platform and vertical-specific solutions. Since February 2010, when we implemented additional tracking related to the time spent on approved research and development projects, we have capitalized an increasing portion of our research and development costs. Our capitalized research and development costs are amortized as a cost of revenue ratably over 60 months upon completion of the project. We expect our fiscal 2015 research and development costs incurred, as a percentage of revenue, to decrease as compared to fiscal 2014.
Sales and Marketing
Sales and marketing costs are primarily comprised of salaries and personnel-related expenses, commissions, travel expense, marketing program fees, services provided by third-party contractors related to our marketing campaigns, amortization related to customer relationship agreements acquired as a result of various acquisitions and costs from facilities and technology-related costs associated with our sales and marketing functions. We plan to invest further in sales and marketing to create brand awareness, expand the scope and scale of our global operations, develop our sales channel and increase revenue from existing customers. Sales and marketing costs in fiscal 2014 were $35.2 million and $9.8 million for the three months ended June 30, 2014. We expect sales and marketing costs in fiscal 2015 to remain consistent with fiscal 2014 in absolute dollars.
General and Administrative
During the three months ended June 30, 2013, general and administrative costs were primarily comprised of the allocated costs related to the services provided by our parent Compuware for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and other services, as well as salaries and personnel-related expenses including stock and cash incentive compensation. Since August 2013, we have invested in hiring staff required to become a fully independent company. As of April 1, 2014, we have largely completed our general and administrative separation from Compuware, and we do not anticipate any significant allocation from Compuware in the future. During the three months ended June 30, 2014, general and administrative costs are primarily comprised of salaries and personnel-related expenses for personnel in these functions including stock and cash incentive compensation and costs from facilities and technology-related costs associated with our corporate functions.
Income Taxes
Provision for income taxes is comprised of federal and state taxes in the United States as well as certain foreign tax jurisdictions. Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in our financial statements and net operating loss carryforwards.
AGREEMENTS WITH COMPUWARE
We have entered into certain agreements with Compuware with respect to a real estate lease and taxes. The lease of the Detroit office expires March 31, 2015.
Under the shared services agreement, Compuware provides us with certain tax, insurance, information technology and other services. In general, we are charged for shared services based on a pro rata allocation of Compuware’s costs. As the Company reduces its dependence upon Compuware for these services, the allocation is virtually eliminated. As of June 30, 2014, this expense was immaterial.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to our Critical Accounting Policies as described in our Annual Report on Form 10-K for the year ended March 31, 2014.
STOCK-BASED COMPENSATION
Stock award compensation expense, for options that do not have performance conditions, is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award.
RESULTS OF OPERATIONS
The following table is a summary of our condensed consolidated statements of comprehensive loss data:
|
| | | | | | | |
| | | Three Months Ended June 30, | |
| | | 2014 | | 2013 | |
| | | |
| Condensed Consolidated Statements of Comprehensive Loss Data: | | | | | |
| Subscription and support | | $15,509 | | $15,942 | |
| Services | | 6,078 |
| | 8,158 |
| |
| Total revenue | | 21,587 |
| | 24,101 |
| |
| Cost of revenue(1) | | 15,266 |
| | 13,310 |
| |
| Gross profit | | 6,321 |
| | 10,791 |
| |
| Operating expenses: | | | | | |
| Research and development(1) | | 3,116 |
| | 2,585 |
| |
| Sales and marketing(1) | | 9,772 |
| | 7,339 |
| |
| General and administrative(1) | | 5,546 |
| | 5,534 |
| |
| Total operating expenses | | 18,434 |
| | 15,458 |
| |
| OPERATING LOSS | | (12,113 | ) | | (4,667 | ) | |
| | | | | | |
| Other Income | | 22 |
| | — |
| |
| | | | | | |
| LOSS BEFORE INCOME TAX PROVISION | | (12,091 | ) | | (4,667 | ) | |
| Income tax provision | | 25 |
| | 3 |
| |
| Net income (loss) | | ($12,116) | | ($4,670) | |
| Basic and diluted earnings per share(2) | | ($0.32) | | ($0.16) | |
| Weighted-average shares outstanding, Basic and diluted(2) | | 37,499 |
| | 30,003 |
| |
| |
| (1) | All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements and line items above include stock compensation as detailed in the table below. |
| |
(2) | Please see Note 3 of our condensed consolidated financial statements and related disclosures for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts. |
|
| | | | | | | | | |
| | | Three Months Ended June 30, | |
| | | 2014 | | 2013 | |
| Stock awards compensation classified as: | | |
| Cost of revenue | | $ | 515 |
| | $ | 5 |
| |
| Research and development | | 66 |
| | 47 |
| |
| Sales and marketing | | 605 |
| | 47 |
| |
| General and administrative | | 1,432 |
| | 387 |
| |
| Total stock awards compensation expense before income taxes | | 2,618 |
| | 486 |
| |
The following table sets forth a summary of our condensed consolidated statements of comprehensive loss as a percentage of our total revenue:
|
| | | | | | | |
| | | Three Months Ended June 30, | |
| | | 2014 | | 2013 | |
| Condensed Consolidated Statements of Comprehensive Loss Data: | | | | | |
| Subscription and support | | 72 | % | | 66 | % | |
| Services | | 28 |
| | 34 |
| |
| Total revenue | | 100 |
| | 100 |
| |
| Cost of revenue(1) | | 71 |
| | 55 |
| |
| Gross profit | | 29 |
| | 45 |
| |
| Operating expenses: | | | | | |
| Research and development(1) | | 14 |
| | 11 |
| |
| Sales and marketing(1) | | 45 |
| | 30 |
| |
| General and administrative(1) | | 26 |
| | 23 |
| |
| Total operating expenses | | 85 |
| | 64 |
| |
| Operating loss | | (56 | ) | | (19 | ) | |
| | | | | | |
| Other Income | | 0 |
| | 0 |
| |
| | | | | | |
| LOSS BEFORE INCOME TAX PROVISION | | (56 | ) | | (19 | ) | |
| Income tax provision | | 0 |
| | 0 |
| |
| Net income (loss) | | (56 | )% | | (19 | )% | |
________________________________________________
| |
| (1) | All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. Refer to the table above for the breakdown of stock compensation included in these line item percentages. |
Three Months ended June 30, 2014 and 2013
Revenue
Revenue derived from our subscription and support and services is presented in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Period-to-Period
Change | |
| | 2014 | | 2013 | | $ | | % | |
| | (In thousands) | | | |
| Subscription and support |
| $15,509 |
| |
| $15,942 |
| |
| ($433 | ) | | (3 | %) | |
| Services | 6,078 |
| | 8,158 |
| | (2,080 | ) | | (25 | %) | |
| Total revenue |
| $21,587 |
| |
| $24,100 |
| |
| ($2,513 | ) | | (10 | %) | |
Our subscription and support revenue decreased to $15.5 million for the three months ended June 30, 2014 from $15.9 million for the three months ended June 30, 2013, representing an annual decline of 3%. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was primarily due to a decline in revenue from customers that terminated or elected not to renew their agreements of $0.8 million. In addition, there were two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014, resulting in an additional aggregate reduction in subscription and support services by $0.5 million. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was partially offset by $0.7 million of increased revenue from sales to new customers and $0.2 million of increased revenue from existing customers.
Our services revenue declined to $6.1 million for the three months ended June 30, 2014 from $8.2 million for the three months ended June 30, 2013, representing a period over period decline of 25%. For the three months ended June 30, 2014, the services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus
last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) our relatively low subscription bookings in the 2014 fiscal year.
Cost of Revenue
Cost of revenue is presented in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Period-to-Period
Change | |
| | 2014 | | 2013 | | $ | | % | |
| | (In thousands) | | | |
| Cost of revenue |
| $15,266 |
| |
| $13,310 |
| |
| $1,956 |
| | 15 | % | |
| Gross margin | 29 | % | | 45 | % | | | | | |
Cost of revenue increased during the three months ended June 30, 2014, as compared to the same period in 2013, by approximately $2.0 million. Cost increases included an increase of $1.1 million in salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations fees. Cost increases also included an increase of $0.5 million in stock compensation expense, an additional $0.2 million related to amortization of our capitalized and deferred costs.
Our gross margin decreased during the three months ended June 30, 2014 as compared with the same period in 2013. Cost of revenue did not decline in line with the decrease in revenue. During May 2014, we reduced the size of our workforce by 69 people to right size our organization and better position our company for profitability. Of the reduction in our workforce, 34 of the employees were previously reflected in our cost of revenue, 22 of the employees were in sales and marketing, and 13 were in research and development. In addition, we transferred 31 employees to our certified partners during the three months ended June 30, 2014.
Research and Development
Research and development costs incurred, expensed and capitalized are presented in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Period-to-Period
Change | |
| | 2014 | | 2013 | | $ | | % | |
| | (In thousands) | | | |
| Research and development costs incurred |
| $3,906 |
| |
| $4,537 |
| |
| ($631 | ) | | (14 | %) | |
| Capitalized internal software costs | (790 | ) | | (1,952 | ) | | 1,162 |
| | (60 | %) | |
| Research and development costs expensed |
| $3,116 |
| |
| $2,585 |
| |
| $531 |
| | 21 | % | |
| Percentage of total revenue: | | | | | | | | |
| Research and development costs incurred | 18 | % | | 19 | % | | | | | |
| Research and development costs expensed | 14 | % | | 11 | % | | | | | |
Research and development costs incurred decreased during the three months ended June 30, 2014, as compared to the same period in 2013, primarily due to a $1.2 million decrease in capitalization of research and development costs. The decrease also included a decrease in salary and benefits by $0.9 million from the three months ended June 30, 2014, as compared to the same period in 2013. Research and development costs also included $0.4 million in costs from facilities and technology-related costs associated with our research and development functions.
We decreased capitalization of our research and development costs during the three months ended June 30, 2014, as compared to the same periods in 2013, due to the timing and stage of our initiatives. In the three months ended June 30, 2014, there was an increase of projects in the planning stage and, thus, more of our project costs were not capitalized.
Sales and Marketing
Sales and marketing costs are presented in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Period-to-Period
Change | |
| | 2014 | | 2013 | | $ | | % | |
| | (In thousands) | | | |
| Sales and marketing |
| $9,772 |
| |
| $7,339 |
| |
| $2,433 |
| | 33 | % | |
| Percentage of total revenue | 45 | % | | 30 | % | | | | | |
Sales and marketing costs increased during the three months ended June 30, 2014, as compared to the same period in 2013, primarily due to a $0.6 million increase in stock compensation expense and a $0.4 million increase in salaries and personnel-related expenses. In addition, the three months ended June 30, 2014 included an increase of $0.5 million in costs from facilities and technology-related costs associated with our sales and marketing functions, as well as an increase of $0.5 million in marketing spend.
General and Administrative
General and administrative costs are presented in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Period-to-Period
Change | |
| | 2014 | | 2013 | | $ | | % | |
| | (In thousands) | | | |
| General and administrative |
| $5,546 |
| |
| $5,534 |
| |
| $12 |
| | — | % | |
| Percentage of total revenue | 26 | % | | 23 | % | | | | | |
General and administrative costs increased during the three months ended June 30, 2014, as compared to the same period in 2013, primarily due to a $1.0 million increase in stock compensation expense, a $0.8 million increase in salary and benefit expense, a $0.9 million audit expense and a $0.2 million increase in travel expenses. The increased costs were offset by a $2.7 million reduction in allocated expenses from Compuware.
LIQUIDITY AND CAPITAL RESCOURCES
In summary, our cash flows were:
|
| | | | | | | | |
| | | Three Months Ended June 30, |
| | | 2014 | | 2013 |
| | | | | |
| Condensed and Consolidated Statement of Cash Flows Data: | | | | |
| Net cash used in operating activities | |
| ($7,977 | ) | |
| ($285 | ) |
| Net cash used in investing activities | | (1,610 | ) | | (2,123 | ) |
| Net cash provided by financing activities | | 3,184 |
| | 2,822 |
|
| Effect of exchange rate | | (4 | ) | | 8 |
|
| Net change in cash | |
| ($6,407 | ) | |
| $422 |
|
Cash Flows from Operating Activities
Cash used in operating activities increased for the three months ended June 30, 2014, as compared to the same period in 2013, primarily as a result of a $2.5 million decrease in revenues, a $2.0 million increase in our cost of revenue and a $3 million increase in operating expenses, primarily sales and marketing. Our increase in expenses was primarily due to a $2.1 million increase in stock compensation expenses, and a $1.3 million increase in salaries and personnel related expenses, a $1.1 million decrease in capitalized research and development.
Cash Flows from Investing Activities
Cash used in investing activities typically consists of the purchase of property and equipment associated with our infrastructure and the capitalization of research and development costs related to expanding our cloud-based platform. Cash used in investing activities decreased for the three months ended June 30, 2014, as compared with the same period in 2013, primarily due to a $1.1 million decrease in cash paid for capitalized research and development, partially offset by an increase in property and equipment purchases of $0.6 million.
Cash Flows from Financing Activities
Cash provided by financing activities increased to $3.2 million for the three months ended June 30, 2014, from $2.8 million for the three months ended June 30, 2013, primarily due to $0.3 million of IPO costs paid in the three months ended June 30, 2013. In addition, the Company received net proceeds from the exercise of stock awards of $0.2 million during the three months ended June 30, 2014.
RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS
New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued, but not yet adopted by us, are included in Note 1 of the notes to the condensed consolidated financial statements appearing elsewhere in this Report.
CONTRACTUAL OBLIGATIONS
The Company entered into standalone operating lease agreements for its Shanghai and Detroit locations in the first quarter of our fiscal year 2015. The Shanghai lease expires on April 30, 2017 and does not contain any purchase obligations associated with the lease. The total future minimum lease obligation of the Shanghai lease is approximately $1.5 million. The lease agreement for our Detroit location expires as of March 31, 2015.
OFF-BALANCE SHEET ARRANGEMENTS
We currently do not have any off-balance sheet or non-consolidated special purpose entity arrangements as defined by the applicable SEC rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to market risks associated with foreign currency exchange rates. We do not use derivative financial instruments or forward foreign exchange contracts for investment, speculative or trading purposes. We believe our foreign currency risk is minimal as 94% and 86% of our revenue was based in U.S. dollars for the three months ended June 30, 2014 and 2013, respectively. In addition, we have no long-term assets or liabilities in foreign currencies. We do not have a material exposure to market risk with respect to investments.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, our disclosure controls and procedures are effective, at the reasonable assurance level, to cause information required to be disclosed in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required financial disclosure.
Changes in Internal Control over Financial Reporting
We began configuration of NetSuite as our ERP System in Fiscal Year 2014. On April 1, 2014, we went live with the initial phase of the NetSuite implementation, (i.e., custodial accounting) which upgrades our information system capabilities and improves our business processes and financial reporting system. Full implementation inclusive of time reporting and contract management remains ongoing. This software implementation project will result in changes in our business processes and related internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Management will continue to monitor, evaluate and update the related processes and internal controls as necessary during the post implementation period to ensure adequate internal control over financial reporting.
Other than the change described above, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning on May 30, 2014, two putative class actions were filed in the U.S. District Court for the Southern District of New York against the Company, directors and certain officers at the time of the Company's initial public offering ("IPO") alleging violation of securities laws in connection with the Company's IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to vigorously defend them. The Company currently has no other outstanding material litigation.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the risks under the heading "Risk Factors" in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 20, 2014, which risks could materially affect our business, financial condition or future results. There has been no material change in our risk factors from those described in the 2014 Annual Report on Form 10-K. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 25, 2013, our registration statement on Form S-1 (File No. 333-188603) was declared effective by the Securities and Exchange Commission for our initial public offering. Pursuant to the offering, we sold an aggregate of 7,360,000 shares of our common stock (which includes the underwriters’ full exercise of their over-allotment option of 960,000 shares) at a price to the public of $10.00 per share. The sale of all of such shares was consummated on October 1, 2013 and resulted in net proceeds to us of $66.3 million after deducting underwriting discounts, commissions and other offering expenses. We used, and intend to continue to use, net proceeds, together with the cash generated from operations, to fund our current operations, repay short-term intercompany payables owed to our parent, Compuware, implement our growth strategies and fund capital expenditures.
Repurchases of Company Common Stock
In June 2014, Compuware purchased 1,381,920 shares of Company common stock in the market and in private transactions with an average price of $4.00 per share. These purchases were made in order to maintain Compuware’s 80% or greater ownership of Covisint common stock in anticipation of the expiration of lock-up agreements applicable to holders of non-qualified stock options to acquire common stock and the subsequent exercise of those options. Compuware is required to maintain 80% or greater ownership of Covisint common stock to enable the contemplated distribution of all or a substantial part of its shares of Covisint to Compuware shareholders to qualify for tax-free treatment under the Internal Revenue Code as previously announced. Furthermore, these purchases were made to reduce the likelihood that Compuware would need to purchase Covisint shares from Covisint under the Master Separation Agreement, as amended, between Compuware and Covisint, and are therefore expected to reduce the cost to Compuware of maintaining greater than 80% ownership of Covisint. The purchases were concluded on June 5, 2014 and Compuware indicates that no further purchases are anticipated.
ITEM 5. OTHER INFORMATION.
In May 2014, the Company entered into a Separation Agreement with Mr. McGuffie. Under the Separation Agreement, Mr. McGuffie remained employed by the Company until June 30, 2014, with full benefits and salary. In consideration for a full release of claims, beginning on July 1, 2014 through March 31, 2015, Mr. McGuffie will receive severance payments in the form of salary continuation at his rate in effect on July 1, 2014 paid in accordance with the Company’s regular payroll practices. The Company will also reimburse Mr. McGuffie for the cost of his COBRA coverage for his health and other benefits selected by him through March 31, 2015. Pursuant to the terms of the Separation Agreement, Mr. McGuffie’s Compuware stock options received the following treatment: (a) his vested and exercisable Compuware stock options remain exercisable through March 31, 2015; (b) his unvested Compuware stock options continue to vest and become exercisable as if he remained employed; and (c) any outstanding Compuware stock options will be terminated and forfeited on March 31, 2015. All of Mr. McGuffie’s Compuware restricted stock units, vested effective June 30, 2014. Pursuant to the terms of the Separation Agreement, Mr. McGuffie’s Covisint stock options received the following treatment: (x) any Covisint stock options granted prior to November 1, 2012 will remain exercisable pursuant to the terms of the original agreement, and (y) any Covisint stock options granted on or after November 1, 2012 were terminated and forfeited on June 30, 2014.
ITEM 6. EXHIBITS
The following exhibits are filed herewith.
|
| | |
| Exhibit Number | | Description of Document |
| 10.24 | | Separation Pay Agreement and General Release between Covisint Corporation and David A. McGuffie |
| 15 | | Independent Registered Public Accounting Firm's Awareness Letter |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act |
| 101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | COVISINT CORPORATION |
| | | |
| Date: | August 7, 2014 | By: /s/ Samuel M. Inman, III |
| | | Samuel M. Inman, III |
| | | Chief Executive Officer |
| | | Principal Executive Officer |
| | | |
| Date: | August 7, 2014 | By: /s/ Enrico Digirolamo |
| | | Enrico Digirolamo |
| | | Chief Financial Officer |
| | | Principal Accounting Officer |
| | | |
